Thread
A thread on “Guns, Babies, and China” (with apologies to Jared Diamond). At the risk of over-simplification, I would argue that the seeds of our economic problems over the last quarter century were sown by 3 major forces, all of which were deliberate policy mis-choices:
(1) wasting of the generous debt restructuring and aid flows that accompanied our role in the war on terror during 2001-2003 on running large fiscal deficits--a bad habit that has since lingered
(2) exceptionally bad demographic trends that have kept fertility rates high and the working population ratio low, pulling down our savings (and investment) and increasing our consumption rates
(3) the signing of a lop-sided free trade agreement with China in 2006 that led to a mushrooming of imports with nothing to show on exports, exacerbating current account deficits. You’re going to want to sit down for this one…
First, the “GUNS” part of the story. We had a real chance to take off after the generous debt restructuring of 2001, courtesy of geopolitical tailwinds from our participation in the war on terror.
This also opened the floodgates of US largesse, during which aid flowed into the country like there was no tomorrow and gave us precious foreign exchange. During 2001-3, this aid allowed us to run an average current account surplus of over 3.5% of GDP, the largest in our history.
But instead of using the fiscal space and foreign exchange provided by this to enact difficult structural reforms to boost investment and grow exports, we wasted it on promoting consumption and running huge fiscal deficits of around 5% of GDP since 2001.
As a result, after falling from 72% of GDP in 2001 to 47% by 2007, general government debt went back up to almost 80% by 2020.
Second, the “BABIES” come marching in. In 1960, each woman in Pak and BGD was producing 7 babies (aka, the "fertility rate"). In Ind, she was producing a bit less, at 6. By the mid 1990s, both India and BGD were down to 3.5, while Pak was still at 6.
Today, at around 4, Pakistan’s fertility rate today is twice what is needed to keep the population constant & close to that in Afghanistan. It is also twice that of Ind & BGD, despite similar levels of development. As a result, our pop grows by a whopping 5 million each year.
Years of high fertility (together with rising life expectancy) have translated into a v high "age dependency ratio" in Pakistan. This ratio is the number of very young (less than 15) and very old people (65+) expressed as a percentage of the working age population (15-64).
This ratio matters because the very young and the very old tend to consume more and save less. Therefore, a high age dependency ratio tends to pull down savings (and hence investment), while pushing up consumption and imports.
This results in pressure on the current account. Today. Pak’s age dep ratio is 70%. In Ind and BGD it is less than 50%. Since 2005, BGD has run a current account deficit of almost 0, India 1.5% of GDP & Pak 3%. Demographics are a major explanation.
And finally, the “CHINA” part of this lost quarter century. In the previous 5 years before the FTA with China in 2006, our exports averaged 14% of GDP and imports 15% of GDP. So they were roughly balanced.
Since then, our exports have fallen to 11% of GDP, while our imports have jumped to 18-20%. This is a large cause of our current account deficits. Providing roughly a third of Pak’s total imports (with another third coming from oil producers), China is our largest import partner.
Meanwhile, only 10% of Pak’s exports go to China. By contrast, since the early 2000s, Ind has seen its exports double on average from 13 to 25% of GDP on the back of IT and BGD has increased them from 13 to around 20%, benefiting from GSP and LDC status for its textile exports.
So there you have it. While the underlying reasons for our economic malaise are complex, they are I think you will hopefully agree rooted in a complete capitulation to the malleable forces of guns, babies and China. Ind and BGD did not succumb. We have only ourselves to blame.
The recommended English soundtrack is, appropriately given the strange times we live in, Nena's 1980s classic...
www.youtube.com/watch?v=hiwgOWo7mDc
www.youtube.com/watch?v=hiwgOWo7mDc
And in Urdu, it is the angelic and dreamy Nazia in front of an equally dreamy audience that reminds us of the way we once were ...
www.youtube.com/watch?v=jlGK3SDRu2o
www.youtube.com/watch?v=jlGK3SDRu2o
